California’s budget troubles are unique—at least for now

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It’s Saturday, Dec. 9, and we’d like to welcome you to the weekly State and Local Roundup. There is plenty to keep tabs on with a federal judge intervening in an abortion case, Houston set to elect a new mayor and Florida rejecting federal money to reduce tailpipe emissions. But first, we start with state budgets.

California lawmakers received bracing news this week when a legislative office warned that the state could face a $68 billion budget deficit through the fiscal year that ends in mid-2025. So far, though, California’s money problems appear isolated. 

“The end of federal aid to states and overall economic uncertainty, including the possibility of a recession, have states preparing for slower revenue growth in fiscal years 2024 and 2025,” wrote analysts for the National Conference of State Legislatures last month. “For now, however, states remain fiscally strong, with many using surpluses from the last few years to invest in one-time projects, return funds to taxpayers or make deposits into rainy day funds.”

In California, the Legislative Analyst’s Office said the extent of the state’s revenue shortfalls for this year and next only recently became apparent. Both California and the federal government moved back their income tax filing deadlines from April to November this year, which gave lawmakers an incomplete picture of the state’s fiscal situation when they passed a budget this spring. As a result, the current year’s revenue will likely be $26 billion lower than what legislators anticipated. The problem will grow in the coming year.

Nationally, the U.S. economy has proved surprisingly resilient coming out of the COVID-19 pandemic. Many forecasters predicted the country would enter a recession because of inflation, supply chain bottlenecks, interest rate hikes, high oil prices and flagging customer demand. Nevertheless, the national unemployment rate has remained low and inflation has declined.

In California, though, it’s been a different story, according to Gabriel Petek, the legislative analyst, in his report. The state entered a downturn in 2022 because of high interest rates set by the Federal Reserve that made it harder for people to buy homes and for startups and other technology companies to go public.

Total income tax collections dropped by 25% last year, Petek noted. “This decline is similar to those seen during the Great Recession and dot‑com bust,” he wrote. “Overall, the experience of the last few years suggests California’s economy and revenues are uniquely sensitive to Federal Reserve actions.”

The budget crunch is severe enough that Gov. Gavin Newsom could declare a financial emergency, which would allow lawmakers to tap the state’s reserves to bridge some of the gap.  But legislators should keep up to half of their reserves in the bank for future years, Petek said.

“Given the state faces a serious budget problem, using general purpose reserves this year is merited,” Petek wrote. “That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts. The state’s reserves are unlikely to be sufficient to cover the state’s multiyear deficits—which average $30 billion per year under our estimates.”

The shortfall could also boost Newsom’s efforts to rein in costs from a law he signed in October that would guarantee minimum wage increases for health care workers, culminating at $26 an hour by 2026. That could have a big impact on the state budget because the state reimburses many medical services through its Medicaid program.

Of course, California’s budget dwarfs that of most other states. It depends on highly volatile income streams—particularly the capital gains generated by initial public offerings and a highly progressive income tax structure—that make it acutely susceptible to swings in the economy.

“This projected deficit would be a record for California,” wrote Alexei Koseff for CalMatters. “But officials noted that it is partly because the budget has grown so much in recent years—the most recent was more than $300 billion—and that the state has closed similar or worse spending gaps, by percentage, in the past.”

That California is an outlier in terms of its budget troubles is a marked departure from states’ experience with the COVID-19 pandemic or the Great Recession, where most headed in the same direction within months of each other.

In Georgia, for example, the state had nearly $11 billion in surpluses at the end of last fiscal year, prompting Republican Gov. Brian Kemp to push for additional tax cuts in October beyond the gas tax breaks and income tax relief he already pushed through.

Kansas, meanwhile, is expected to end the fiscal year with roughly $2.8 billion in the bank, setting up a potential clash between Democratic Gov. Laura Kelly and the Republicans who control the state’s legislature.

“The state continues to bring in a lot more money than it needs, and it’s past time for this hard-earned taxpayer money to go back to Kansans in the form of long-term, actual tax relief that folks can rely on long into their futures,” said top legislative Republicans in a statement last month.

Partisan divides have kept Wisconsin from spending down what’s expected to be a $4 billion surplus by the end of its two-year budget cycle. Democratic Gov. Tony Evers called for more spending on schools, along with paid family and medical leave. Republican lawmakers wanted tax cuts, instead. Neither got what they wanted, and now the state is sitting on a heap of cash.

“I think everybody agrees that the state of Wisconsin does not need to carry reserves that equal almost half of its budgeted spending for a given year,” Jason Stein, the research director at the Wisconsin Policy Forum, told Wisconsin Public Radio.

In Minnesota, analysts expect a $2.4 billion surplus, with a catch: They expect a deficit in the upcoming two-year budget cycle of nearly the same size. “We do need to be measured,” Democratic Gov. Tim Walz said. “We need to be careful about where we spend money.”

Keep reading as there’s more news to use below, and if you don’t already and would prefer to get this roundup in your inbox, you can subscribe to this newsletter here. We’ll see you next week.

News to Use

Trends, Common Challenges, Cool Ideas, FYIs and Notable Events

• ABORTION: Judge says Texas woman may abort fetus. For the first time in at least 50 years, a judge has intervened to allow an adult woman to terminate her pregnancy. When Travis County District Judge Maya Guerra Gamble handed down the temporary restraining order Thursday, she said that the idea that the plaintiff “wants desperately to be a parent, and this law might actually cause her to lose that ability is shocking and would be a genuine miscarriage of justice.” Kate Cox and her husband wanted to have the baby, but her doctors said continuing the nonviable pregnancy posed a risk to her health and future fertility, according to a historic lawsuit filed Tuesday. Texas Attorney General Ken Paxton responded Thursday afternoon in a letter addressed to three hospitals saying the temporary order would "not insulate hospitals, doctors, or anyone else, from civil and criminal liability for violating Texas’ abortion laws."


• TAILPIPE EMISSIONS: Florida declines $320 million in federal money. The state’s Department of Transportation has turned down funding aimed at reducing tailpipe emissions, arguing federal transportation officials are overstepping their authority. U.S. Transportation Secretary Pete Buttigieg was notified in November that the state would not participate in the federal Carbon Reduction Program, a five-year, $6.4 billion effort focused on emissions that contribute to climate change. The state argued that the feds had not published or provided guidance “on the process under which the secretary will certify state transportation emissions reductions.” Days after the state’s decision, the White House announced a finalized performance measure for state transportation agencies to track transportation-related greenhouse gas emissions and set reduction targets. The performance measure does not impose penalties for missing targets.


• ELECTIONS: Young voters in Houston set to pick its new, older mayor. A mayoral runoff Saturday between state Sen. John Whitmire, 74, and U.S. Rep. Sheila Jackson Lee, 73, has the fourth-largest city in the U.S. on the verge of choosing a new leader who cuts against Houston's demographic trends. Census figures show Houston is becoming younger, with a median age of around 35 and 25% of the population below 18. Although other City Halls have not exactly been swept up in a youth movement—New York Mayor Eric Adams is 63 and Los Angeles Mayor Karen Bass is 70—the choices in Houston have frustrated some of voters in the Democratic stronghold, particularly younger ones, at a time when the party is searching for new political stars in Texas who might be able to end 30 years of GOP dominance statewide. 


• LGBTQ RIGHTS: AGs oppose proposed federal rule for LGBTQ foster kids. Nineteen states joined together last week to oppose a proposed federal rule that aims to protect LGBTQ youth in foster care and provide them with necessary services. The attorneys general, led by Alabama Attorney General Steve Marshall, argue in a letter to the U.S. Department of Health and Human Services that the proposed rule—which requires states to provide safe and appropriate placements with providers who are appropriately trained about the child’s sexual orientation or gender identity—amounts to religion-based discrimination and violates freedom of speech.


• HOUSING: An ‘audacious’ plan to build starter homes for young Utahns. In recent years, home prices in the Beehive State are the highest in state history, and the number of families who experienced homelessness for the first time grew. Gov. Spencer Cox is trying to flip that trend with what he is calling “a very audacious proposal.” The governor wants the state to build 35,000 new starter homes in the next four years, he announced Tuesday. That goal is the “centerpiece” of his fiscal 2025 budget and relies on a series of proposals that will have to get legislative approval during the upcoming session that starts in January.


• LIBRARIES: Are school libraries a “forum for government speech”?  That is the argument Florida is making in a pair of lawsuits filed in federal court over the removal of books in school libraries. The state is arguing that school districts have a First Amendment right to remove LGBTQ books. Or any book, for that matter. It’s a contention that First Amendment experts and advocates call extreme and chilling. But the state maintains the books on school shelves represent protected government speech. Public school libraries are “a forum for government speech,” not a “forum for free expression,” it says. “Public-school systems, including their libraries, convey the government’s message,” Florida Attorney General Ashley Moody wrote in a legal brief.


• TRANSPORTATION: Maryland looks to cut $3.3B in transportation projects. County officials and state legislators are lashing out at a plan to cut billions in transportation projects across the state. Maryland Transportation Secretary Paul Wiedefeld, in an interview Tuesday, said the department is forced to address $3.3 billion in shortfalls and will impose across the board budget cuts, hiring freezes, fee and parking rate increases as well as defer hundreds of millions in projects across the state. “This is not a new problem for our state,” Wiedefeld said. “Since 2020, [structural issues with the budget] have been exacerbated by historic inflation impacting labor and materials costs, depleted COVID-19 relief funding, and the gradual decline of transportation’s largest revenue source—motor fuel tax revenue.”


• FOOD STAMPS: Alaska struggles with another food stamp backlog. At least 1 in 10 Alaskans who depend on federally funded food stamps are now waiting on that critical aid as a new backlog grows at the state office responsible for processing those benefits. The latest issues include weather-related office closures, technology glitches and a reinstated interview requirement, which the state says has made application processing even more time-intensive. Now, facing a growing crisis, officials have decided to hold off on conducting those interviews—falling out of compliance with federal regulations—to stop the backlog from growing. In Alaska, more than 92,000 people participate—about a third are children—in the Supplemental Nutrition Assistance Program, or SNAP. The previous backlog affected more than 14,000 Alaskans and their families, who were forced to rely on food banks, food pantries and help from friends and neighbors while they waited as long as 10 months for the state to process their benefits.


• RE-ENTRY: Californians may get $2,400 upon release from prison. Hundreds of Californians released from prisons could receive direct cash payments of $2,400—along with counseling, job search assistance and other support—under a first-in-the-nation program aimed at easing the transition out of incarceration and reducing recidivism. Recipients will get the money in a series of payments after meeting certain milestones such as showing progress in finding places to live and work, the Center for Employment Opportunities, which runs the program, announced this week. The goal is to give people a chance “to cover their most essential needs” like bus fare and food during the crucial early days after exiting incarceration, said Samuel Schaeffer, CEO of the national nonprofit that helps those leaving lockups find jobs and achieve financial security. “The first three to six months are the riskiest, when many people end up back in prison,” Schaeffer said Thursday. “We want to take advantage of this moment to immediately connect people with services, with financial support, to avoid recidivism.”


• COPPER THEFT: Copper wire thefts have darkened St. Paul streets. Copper theft in the Twin Cities and around Minnesota has increased this year. St. Paul is scrambling to find new approaches to thwart copper wire thieves. Streetlight repair due to wire theft cost the city $777,000 so far this year, more than seven times the amount for all of 2020. Theft went from being relatively uncommon to happening one to two times a month, which can impact hundreds of customers for up to two to three weeks before the damaged facilities can be fully restored. The wire theft problem isn’t unique to St. Paul. In October, Los Angeles, which has also seen a spike in copper thefts, issued a call for innovation in an effort to find solutions to the growing problem.


• CORRUPTION: Illinois residents can now report government corruption online. Illinois is world-renowned for its corruption. Four of the state’s last 10 governors have gone to prison. Members of former Illinois House Speaker Michael Madigan’s inner circle have been convicted, with Madigan himself set to face trial next year. Former Chicago Ald. Ed Burke is currently on trial. Now, the Illinois State Police are adding a tool to their anti-corruption arsenal: an online complaint form. Last week, the agency said it will let the public anonymously report public officials they suspect of corruption. The portal is part of an effort to make the State Police’s Special Investigations Unit a clearinghouse of sorts. The unit was formed in March 2020 specifically to target public corruption. It’s opened 82 investigations so far. But Kent Redfield, a longtime Illinois political expert, said he’s not sure how effective the new online form is going to be.

Picture of the Week

I’ve gotta say, I’m a fan of the loon.https://t.co/njP6fbT0O3

— Governor Tim Walz (@GovTimWalz) December 5, 2023

Minnesota has picked its new state seal and good news for loon lovers: It prominently features the bird. The State Emblems Redesign Commission on Tuesday unanimously picked the new design out of five finalists, citing public support. Around 6,000 people submitted online comments to the panel about the seal, which is on official government documents. All finalists included a star on their designs; the winner was the only one with the state bird on it. The commission may make design modifications to it. There have been discussions about removing 1858—the year of statehood—and the state motto "L'Etoile du Nord." Both the flag and seal must be chosen and submitted in a report to the legislature by Jan. 1. They will then be debuted on Statehood Day, which is May 11. 

What They’re Saying

"My first-grader, my fifth-grader and my preschooler ... they are all Noles and they are big-time fans and they do the tomahawk chop and they were not happy.” 

Republican Gov. Ron DeSantis took the College Football Playoff committee to task Tuesday, slamming its decision to exclude the undefeated Florida State football team from the four-team playoff. DeSantis, speaking at a news conference to detail his proposed $114.4 billion budget for Florida, said he is asking for $1 million to let Florida State sue the CFP committee even though the championship will be decided months before a budget is approved.